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Panama opens Asia to US LNG exports

Australian megaprojects are under threat from Atlantic basin producers, as expansion of the Panama Canal opens a new LNG trading route, writes Kwok W Wan

The expansion of the Panama Canal will give US Gulf coast liquefied natural gas (LNG) exporters direct access to Asia, threatening billions of dollars of Australian LNG investment.

Last week, BG Group gave a boost to proposed US export projects, after agreeing to buy 3.5 million tonnes a year (t/y) of LNG from Cheniere's planned Sabine Pass liquefaction project, which could start sending out shipments in 2015. 

Another three US Gulf coast LNG export projects – Lake Charles, Freeport and Cameron – are also under consideration, which would bring the US' total export capacity to 52 million t/y (over a fifth of the global LNG market of 225 million t/y) if they are all brought on line (see Table 1).

Meanwhile, the $5.25 billion expansion of the Panama Canal will allow larger-capacity ships – including big LNG carriers – to pass through it for the first time from 2014. This will give US Gulf coast suppliers a direct portal to the world's two largest, and highest paying, LNG consumers – Japan and South Korea – potentially snatching customers from Australia, which already has some of the most expensive LNG on the market.

Australia in trouble

"If the US goes big on LNG exports, Australia is in trouble," claimed one Asia-based LNG trader. "The breakeven cost for Australian LNG is way too high in comparison with North America. [Australian producers] rely on premium LNG buyers to underwrite the capacity to make projects viable; and other suppliers will also face increasing pressure to review pricing."

Australia could be exporting up to 100 million t/y of LNG by 2020, overtaking Qatar as the world's largest producer. But Australian LNG is expensive, thanks in part to rising construction costs – including steel and a lack of labour  – as well has higher prices for gas feedstock. The estimated breakeven cost for Australia's LNG megaprojects ranges between $8 and $12/million British thermal units (Btu).

This compares with Qatar's LNG, which comes with a hugely lower price tag, at under $1/million Btu, mostly because the Middle East producer profits from associated liquids production and sales.

For now, Australian projects remain viable because they cash in on the high prices paid in import-dependent Asian markets for LNG cargoes. And Asia has already been attracting Atlantic-basin cargoes after LNG spot prices nearly doubled to $18/million Btu this winter, making an attractive arbitrage opportunity for energy traders and big market players alike. 

But, with the Panama Canal expansion, Atlantic-basin LNG producers gain easy access to the Asian market, allowing US Gulf suppliers to compete for lucrative, long-term contracts as well as profiting from spot deals.

Europe or Asia?

LNG traders estimate BG's breakeven cost for Sabine Pass, on the US east coast, at $11.7/million Btu, based on the price formula agreed with Cheniere of 115% of Henry Hub, plus $2.25/million Btu, meaning it is roughly even with Australian prices. The Panama Canal expansion could make LNG deliveries to Asia more profitable for US east coast suppliers than the Atlantic crossing to the UK – the world's third-largest LNG importer (See Table 2).

Without the Panama Canal expansion, one trader estimated a round trip from the US Gulf coast to Asia could nearly double shipping costs to $6/million Btu, nudging US LNG exports above Australian prices.

"The economics is fine in today's market – US exports could go to any market. By the time [Sabine Pass] comes on stream, the Panama Canal will have been widened and LNG carriers will be able to transit. So it's reasonable to assume quite a bit [of Sabine Pass' LNG] will go to Asia," said Tony Regan, principal LNG consultant at Tri-Zen.

The US already re-exports imported LNG – rather than domestically produced LNG – from Gulf Coast terminals. According to government data, the country has re-exported 24 cargoes since the beginning of 2010. Of these, 12 cargoes went to Asia, nine to Europe and three to South America. But the widening of the Panama Canal will tip the balance further towards Asian deliveries. The upgrade will allow all but two of the global LNG tanker fleet to pass through. By 2014, the LNG tanker fleet is expected to number 433.

BG's master plan

BG also has the advantage of operating its own LNG tanker fleet, as well as owning import-capacity rights in the US, UK, Chile and Italy. Last year, BG said that although it had a core fleet of 11, and two flexible vessels, it utilised 17-23 ships at any one time. The company also has upstream shale-gas stakes in the US, which could be used to hedge its LNG business.

"The issue is what happens if Henry Hub prices go up to $8/million Btu or higher. US exports may still work to most markets, but it's also a neat hedge, because anything BG loses on the LNG cargoes because of higher US prices, it makes up by securing a higher return for its US gas production," Tri-Zen's Regan said.

BG partners Exco in developing shale-gas acreage in the US Haynesville and Marcellus plays. It is also developing the 8.5 million t/y Queensland Curtis LNG (QCLNG) project in Australia – based on coal-bed methane resources – with first cargoes expected in 2014. From QCLNG, BG has already secured a 3.6 million t/y purchase deal with China's CNOOC and a 1.2 million t/y agreement with Tokyo Gas. 

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